Opinion: India’s Rajan has a point: We ARE all in this together

LONDON (MarketWatch) — One of the most chilling phrases in the lexicon of the world’s political economy is “We’re all in this together.” It’s similar to “We’ll do what it takes.” The translation is “You are all going to pay.”

The expression comes up to call for some kind of bogus solidarity in the euro area, to heal divisions over taxation and employment in the U.K., to stoke “one nation” bipartisanship in Barack Obama’s America or to gain Chinese citizens’ support for reforging Beijing’s economic model. We see it again during the gathering storms over financing emerging-market economies.

Whenever, on the basis of supposed common interest, one nation or group of people appeals for backing from another faction, you can be sure that it’s all going to cost you a great deal of money.

The latest example has come from criticism by Raghuram Rajan, governor of the Reserve Bank of India, of alleged selfishness from the U.S. and other industrialized countries contributing to unrest in emerging markets.

The gist of the argument is that the Federal Reserve should take care with “tapering” its monetary stimulus policies, which earlier sparked enormous capital flows into developing countries.

Damaging outflows from these emerging markets, Rajan says, will eventually end up hurting the West, which in its own interest should rekindle the global policy solidarity that helped pull the world out of the 2008 financial crisis but is being sadly neglected now.

We saw the same arguments at the International Monetary Fund’s annual meeting in Washington in October, when Ben Bernanke, the then-Fed chairman, was persuaded to issue an emollient form of words stating that the Fed was indeed taking everyone’s sensitivities into account in preparation for modifying its asset-purchase program.

A less mealy-mouthed — and more realistic — rebuff came last week from Dallas Federal Reserve Bank President Richard Fisher who defended the U.S. central bank from complaints that the Fed was ignoring the impact of tapering on other countries.

“Some believe we are the central bank of the world and should conduct policy accordingly. We are the central bank of America,” Fisher said in a speech in Forth Worth.

Fisher’s rebuke was very similar in its underlying psychology to the defense brandished by Angela Merkel, the German chancellor, against charges that Germany is running an exaggeratedly high current-account surplus.

As an arithmetical inevitability, Berlin’s critics say, Germany is greatly complicating other countries’ task of funding the ensuing deficits. Merkel responds by saying that Germany should put self-help first and that any policy of restraining German competitiveness would be bad for the rest of the world.

Ultimately, the arguments wielded by Fisher and Merkel will win the day. Stronger nations accused of egoism will always have the upper hand over weaker ones forced on to the back foot.

The wiser heads in emerging-market economies have always known that the slowing of U.S. bond-buying, when it eventually came, would be painful.

That includes officials in some countries such as Brazil, Turkey, South Africa and Indonesia hardest hit by the past few weeks’ market backlash. As a senior official said to me in Brasilia last June, you can’t criticize the U.S. for sparking so-called “currency wars” when emerging-market currencies
USDBRL, +0.2165%
are rising, and then complain anew when the policy is reversed and non-dollar currencies are coming back down to earth.

Rajan’s remarks last week claiming that “international monetary co-operation has broken down” detract attention from the real issues. His comments represent his own form of protest against the immobility of the Indian political and economic system that has prevented the country from taking timely preparatory action to protect it from the certainty that the Fed’s monetary injections would one day end.

Undoubtedly, though, there is truth in the argument that restrictive policies in different parts of the world — even though carried out for ostensibly sensible domestic reasons — send out growth-regarding ripples into other regions. In the end, everyone will pay for the resulting slowdown.

Rajan’s spleen should have been targeted not at the U.S. but at the euro area, where a combined monetary and fiscal squeeze provides ever-more-significant evidence of a deflationary threat. The single-most-damning statistic is that the euro area (including some countries with the biggest surpluses such as Germany and the Netherlands) has developed from a region with a current-account deficit of $96 billion or 0.7% of combined gross domestic product in the pre-recession year of 2008 to a surplus of $295 billion or 2.3% of GDP last year, according to the IMF.

The turnaround of nearly $400 billion in the euro area’s current-account performance was necessary to damp economic overheating in errant peripheral countries that have since mended their way in the most wrenching fashion, through extreme falls in demand and high unemployment. But it has necessarily added to other countries’ problems, as Rajan’s expression of populist frustration showed.

The moral of the story is that the euro area, too, will get caught up in the emerging-market turbulence, as lower demand for German exports eventually feeds through into bad news on the European mainland. So Rajan has a point. We are all in this together. But some will feel the anguish earlier than others — and with more distress.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.